Saturday, February 2, 2019

Weekend reading links

1. The $3 trillion hedge fund industry is facing strong headwinds. Fund raising is stagnant or declining, institutional investors are increasing own-management, fund closures outnumber new launches, fee rates and returns are declining, once large funds with LP investors are retreating to become family funds to manage the GP's wealth.

Sample the decline and decline of hedge fund returns,
And changes in the traditional 2-20 fee structure
2. Russell Napier points to a structural shift in the demand for US Treasuries,
The roughly $10tn rise in world foreign exchange reserves between 1999 and 2014 resulted in the forced purchasing of US Treasuries. Foreign central bankers owned just 13 per cent of the Treasury market in 1995, but held a third of it by 2014. This monetary system thus provided a funding holiday for global savers, freeing them to focus on funding the private sector instead. Meanwhile, central bank liabilities increased by $10tn. What could be better for global investors than a monetary system that depressed the global risk-free rate while boosting growth through an explosive rise in the money supply of emerging markets, particularly China? For equity investors the combination of a low discount rate and high growth rate drove prices and valuations higher until 2014. Since then, though, as foreign exchange reserves have stopped climbing, the job of funding the US government has fallen to savers, not central bankers. Foreign central bank ownership of US Treasuries has fallen from a third five years ago to just under a quarter today. Savers must take up the funding slack, while also buying the Treasuries now being sold by the Federal Reserve. 
3. The Economist proclaims the arrival of "slowbalisation" or the slowdown in globalisation. Of a dozen measures of globalisation, eight have been retreating or stagnant, with seven starting from 2008.
As to reasons,
After sharp declines in the 1970s and 1980s trading has stopped getting cheaper. Tariffs and transport costs as a share of the value of goods traded ceased to fall about a decade ago. The financial crisis in 2008-09 was a huge shock for banks. After it, many became stingier about financing trade. And straddling the world has been less profitable than bosses hoped. The rate of return on all multinational investment dropped from an average of 10% in 2005-07 to a puny 6% in 2017. Firms found that local competitors were more capable than expected and that large investments and takeovers often flopped. Deep forces are at work. Services are becoming a larger share of global economic activity and they are harder to trade than goods. A Chinese lawyer is not qualified to execute wills in Berlin and Texan dentists cannot drill in Manila. Emerging economies are getting better at making their own inputs, allowing them to be self-reliant. Factories in China, for example, can now make most parts for an iPhone, with the exception of advanced semiconductors. Made in China used to mean assembling foreign widgets in China; now it really does mean making things there.
For example, the share of cross-border supply chain sourcing from neighbourhood has risen since 2012,

Multinational activity is becoming more regional, too. A decade ago a third of the fdi flowing into Asian countries came from elsewhere in Asia. Now it is half. If you put Asian firms into two buckets—Japanese and other Asian firms—each made more money selling things to the other parts of Asia than to America in 2018. In Europe around 60% of fdi has come from within the region over the past decade. Outside their home region, European multinationals have tilted towards emerging markets and away from America. American firms’ exposure to foreign markets of any kind has stagnated for a decade as firms have made hay at home.
And the extent of cross-border integration has been deceptive,
Typical American Facebook users have 70% of their friends living within 200 miles and only 4% abroad. The cross-border revenue pool is relatively small. In total the top 1,000 American digital, software and e-commerce firms, including Amazon, Microsoft, Facebook and Google, had international sales equivalent to 1% of all global exports in 2017. Facebook may have a billion foreign users but in 2017 it had similar sales abroad to Mondelez, a medium-sized American biscuit-maker.
4. It is not all gloom about the Chinese economy,
the pace of debt accumulation has slowed sharply. In 2015 it took more than four yuan of new credit to generate each yuan of incremental gdp. In 2018 that multiple fell to 2.5, in line with China’s average over the past 15 years.
5. There are more people living in extreme poverty in the middle-income countries than in low income countries.
6.  As the US tightens sanctions on Huawei and talk of a new Cold War rises, it is worth looking at this graphic which shows how much China is exposed to advanced economies in terms of exports. While less than 10% of US exports are destined for China, more than half of Chinese exports are destined for advanced economies.
7. Good article on Chinese industrial policy involving using state-funds for strategic acquisitions that helped local industrial capacity development on micro-electromechanical systems (MEMS), the components embedded in chips that are increasingly central to everything from mobile phones and medical devices to self-driving cars.

No comments: